Trade openness and manufacturing-led industrialisation in small economies: evidence from Malawi

Abstract

While trade openness is widely recognised as a key driver of industrialisation in developing economies, Malawi’s manufacturing sector has remained small and weakly responsive despite decades of trade liberalisation. This has limited progress in structural transformation, export diversification and sustainable economic growth. Using annual time-series data from 1980 to 2021 and applying the error correction variant of the autoregressive distributed lag model, this study examined the short-run and long-run effects of trade openness on manufacturing sector performance in Malawi. The results show that trade openness has a positive and statistically significant effect on manufacturing output in both the short run and the long run. However, the effect is inelastic, indicating that manufacturing output responds weakly to increased trade integration. Gross fixed capital is found to significantly enhance manufacturing output across both time horizons, while financial development has a negative long-run effect, suggesting a limited flow of credit to productive industrial activities. The findings imply that trade openness is a necessary but not sufficient condition for manufacturing-led growth in Malawi. Trade liberalisation should therefore be complemented by policies that strengthen domestic productive capacity through sustained investment, improved access to industrial finance and targeted industrial support.